If you are having trouble justifying your fees then you need to REALLY understand Return on Investment (ROI) – it is the key to earning higher fees and your clients still thinking you might be excellent value.
Here is an outline of key concepts on how to approach your own sales meetings from an RETURN ON INVESTMENT perspective. It’s simple and painless and also makes selling easier!
Sales experts take return on investment (ROI) very significantly, especially when selling business-to-business. They understand from bitter experience that their own prospects want to see a return on their costs, whether capital or operating expenditure.
As a business developer you cannot take those risk that some accountant sitting in an office, with no clue in regards to the finer points of your product or service, does not show for out on some more subtle benefits. The business developer needs to take charge of the quantities to ensure the accountant sitting in the back office has all the numbers and calculates the correct ROI.
Another reason to take an interest in ROI is to make sure you are not wasting your time trying to close a project with a poor ROI. You can use ROI as a way of qualifying the sale and not wasting time that could be spent finding prospects with a far better prospect for ROI.
ROI is focused on cash flow
If you make an investment it indicates shelling out some cash in the expectation of having more cash back. It’s all about income. In more complex projects, like purchasing a new machine, you will have cash moves relating to the purchase of the machine and additional operating costs and then some form of cash benefits such as increased product sales or reduced costs. Some ROI calculations can be calculated on the back again of an envelope but most require an Excel spreadsheet to total up all the cash inflows and outflows. The important thing about the cash flows is that they are usually done over time as opposed to being lumped altogether.
Incremental Cash Flows
All those things matters in ROI calculations will be how cash flows will change due to your decision. In simple isolated purchases you might be able to calculate the pregressive cash flows directly but in more complicated investments you do a full cash flow of the affected parts of the business and compare that with an alternative cash flow because of the change. Calculating the difference between your two will give you the incremental money flows.
Cumulative Incremental Cash Flow
Total cash flow is simply the net of all money flows up to one point in time. When looking at the cumulative incremental cash flow it is possible to see where “payback” occurs. This is when any initial outlay has been fully recovered. The payback period is the amount of time it takes to achieve payback.
One of the most simple and yet most reliable indicators is the payback period. This tells you how long it takes to get your cash back. It is normally expressed as a way of measuring time, for example 3. 5 days, 6 months, or 2 years. Projects that can show a fast payback are normally looked on favourably. It should be possible to look at the cumulative incremental cash moves and see the point at which the change from negative to positive occurs. There is also a strategies Excel of calculating payback periods using cell formulae.
Jason has a decision to make. He has the chance to save money on his monthly phone bills. He has found a new supplier that can save him about 50 percent on his monthly phone bills. There is certainly, however , a large set up charge that he must pay for. His initial outlay is £300 but he saves £50 per month on his phone expenses. What is the payback period?
The answer is 6 months.
Simple ROI Calculation
RETURN ON INVESTMENT % = 100* (Incremental advantages – incremental costs)/Incremental costs
The easiest ROI calculation is just a straight computation of net benefits over task costs. Its OK for brief projects of a finite length although not much use for projects such as the one above with ongoing benefits. Where do you draw the line? Including 3 years of benefits would give another return to 2 years.
Net Present Value (NPV)
Would you rather have cash today or cash later? If I were to offer the choice of £100 now or even £100 in 2 years time after that most people will go for the £100 today. Its money in the bank – much less risk and it can be earning interest or be used to finance some other projects. What if the choice was £100 now or £800 in two years time? You might be inclined to wait for your larger payment although £800 in 2 years time will probably not be worth the same as £800 today. This is because inflation will eat away at the worth. Net present value helps to translate future net cash flows directly into what it might be worth in today’s cash terms. This helps in making investment decisions between projects of differing period.
If you ever need to calculate NPV however suggest you seek out an accountant who would get incredibly excited at the prospect! Believe me, it will make their day! If you are selling components of a capital nature then you may wish to invest in an Excel template like Financial Metrics Pro by Alternative Matrix (solutionmatrix. com). You can down load a free lite version if you are in least bit curious!! The process of determining NPV is called discounting and an incremental cash flow that has gone through the discounting process is known as a discounted cash flow. A company will have their own internal rate they use for discounting projects that is based on the cost of raising finance.
Inner Rate of Return (IRR)
The prospect of calculating IRR gets accountants even more excited!! It’s a calculation functions out a rate of return of a future income stream. It effectively discounts the cash flow and confronts a single rate of return at the same time. The calculation effectively works out the particular return from immediately reinvesting any cash flows arising from the project. A company assessing a proposal can expect the IRR to be higher than their own cost of raising finance or even its not worth the trouble (financially anyway). If the company provides competing projects then they will evaluate the IRRs. There is an Excel method (=IRR) for calculating the IRR and Financial Metrics Pro furthermore includes IRR as one of its metrics.
ROI and the sales process
If ROI is so important for the prospect then it makes sense to seek prospects with a higher likelihood of ROI and weed away those prospects that are unlikely to get the customers accountants excited! The initial fact find stage of the sales procedure is the time to get as much info as possible to be able to assess the early probability of a good ROI. The prospect will normally be pleased to help so that they are not wasting time. You can get an idea from the relevant cash flows by considering the implications to the specific business places affected by your product or service.
The incremental cash flows essential to determine ROI come from the difference between the future cash flows and the current status quo. It is as important within the sales process to uncover the cost of ongoing with business as usual as it is to find out how the business will change following a decision to go ahead. APR is a simple aide memoire to make sure you discover the main elements areas of cash flow influence.
A – Alternative
P : Price
R – Return
The business developer should be sure to use open questions and an open mind to find out the required detail.
What would be the alternative to going ahead with the project? This is about discovering the cost of this self-destruction. What are the main areas of current or even future pain that will occur when there is a decision to do nothing?
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Just getting this information alone is normally good enough in order to qualify a lead and overcome most price objections.
Exactly what would be the costs associated with going ahead with all the project? The business developer should be cautious not to just consider the deal cost but should also investigate the roundabout costs that the prospect will incur as a result of going ahead with the choice. For example , the price of replacing a software program for a large organisation will usually be much more that the investment within the software. There will be costs associated with migration to the new software such as user acceptance testing, training, project management, even process re-engineering. The business developer needs to be thorough in this area as this is the area that the accountants focus on.
What would be the returns arising from going ahead? This is often the increases in revenues or even reduction in costs. Many of the cost cutbacks will become clear as a result of discovering the alternative.
‘No Brainer’ ROI
You can have hours of fun doing return on investment computations! The best type of ROI is what We term a ‘No Brainer’. From the decision that can be made without much believed at all, let alone doing full ROI calculations. The payback period is definitely less than a year and the cost of the choice, the price and the returns are all very clear. Business developers would make a lot more progress developing accounts if the first sale to a new prospect has a ‘No Brainer’ ROI to it. When the account is established and a good partnership has developed then it will be much easier to get access to the information that would be required for a more complicated project.